A money manager is an entity that manages an investment on behalf of an investor. An individual money manager has an investment style that reflects a particular investment philosophy. For example, a money manager's investment style might be large cap growth, large cap value, small cap, or fixed income. Of course, other investment styles are known. A money manager defines a style model that reflects his or her particular investment style. The investment is, accordingly, transacted in accordance with the style model. An individual money manager may have multiple investment styles. In such a case, that money manager is associated with multiple style models, each reflecting a different investment style.
A money manager often manages investment accounts for one or more clients. A client can be any of a number of different types of entities, including a sponsor; an individual broker or a brokerage firm, sometimes also known as a broker dealer (essentially synonymous with “sponsor”); an outsourcer; a holding company; or an investment manager. Thus, an investor may be several steps removed from the money manager managing the investor's investment. For example, the investor may work with a financial advisor who opens an account on the investor's behalf with a brokerage firm, perhaps through a broker. The brokerage firm in turn opens an account with the money manager. However, other times the financial advisor may manage the investment account directly, and thus act like a money manager. Such a situation is referred to as a “rep-as-manager” scenario. It should also be noted that a money manager (or entity performing the function of a money manager) may manage investment accounts associated with different programs offered to investors by a client. For example, one account might be part of a multi-strategy portfolio (MSP) program in which different portions of an investor's investment are managed by different money managers, while another account might be part of a “rep-as-manager” program. “Rep-as-manager” programs are typically created by a client (in this case, more specifically a sponsor or brokerage firm), as are many other programs. Other examples of programs include mutual fund programs, traditional wrap programs, and proprietary wrap programs. In addition, an investment account may be associated with a client's chosen “strategy”, which could further be reflected in one or more programs that a client offers. A few examples of “strategy” include: “conservative”, “aggressive”, and “international”.
As an example of a style model, a money manager could define an asset allocation for a style model as shown in Table 1 below.
TABLE 1ASSETPROPORTIONIBM20%CKFR10%STSH30%AOL10%Cash30%For the exemplary asset allocation shown in Table 1, as an initial investment is received it is distributed in accordance with the style model. If the initial investment were $10,000, the investment would be distributed as shown in Table 2 below.
TABLE 2ASSETHOLDINGIBM$2,000CKFR$1,000STSH$3,000AOL$1,000Cash$3,000
Over time, due to account activity and other factors, the account typically will become either underweighted or overweighted in one or more assets. Either as an automatic function, or manually initiated, the account is rebalanced to bring it back in line with the style model. Rebalancing typically includes selling overweighted assets and purchasing underweighted assets. As will be understood by one of ordinary skill in the art, money managers typically utilize automated portfolio management systems in administering accounts. Thus, the money manager's automated portfolio management system will typically identify the need for rebalancing and identify the trades and other transactions necessary to rebalance the account.
Oftentimes restrictions are placed upon one or more accounts managed by a money manager. Some money managers allow an investor, perhaps through a client, to place one or more restrictions on the investor's individual account. Such a restriction is known as an account level restriction. Sometimes a money manager places one or more restrictions on the entire style model such that the restrictions apply to all individual accounts. Such a restriction is known as a style level restriction. It should be noted that, as allowed by a money manager, another entity might establish a style level restriction (e.g., a client). Also, some money managers facilitate program level restrictions, which apply to accounts associated with a particular program. Often, program level restrictions are established by a client and apply to accounts that are associated with that client and belong to a certain program. And, some money managers allow client level restrictions that apply to all accounts associated with a particular client. A restriction that applies to more than one account is said to apply to a trade block.
A restriction, no matter the level, typically affects “buy” and “sell” decisions. For example, a restriction might stipulate that no AOL stock be held in an account, or that CheckFree should never drop below ten percent of the total holdings of an account. A restriction may be established at any point in time: before an initial allocation of assets according to a style model, after an initial allocation, or even after one or more rebalancings.
Conventionally, during distribution of new investments and rebalancing of existing accounts the money manager portfolio management system will determine if any applicable restrictions exist. In the above example of a restriction against ownership of AOL stock, a restriction violation would be detected. This detected violation would then be flagged for review and resolution by a human operator. It should be noted that a violation may be flagged in the context of a single account, or a trade block. As will be appreciated, human review and resolution of violations is costly to the money manager both in terms of man-hours and monetary expense.
In the case of the restriction against ownership of AOL, an asset allocation as shown in Table 2 would produce a flagged restriction violation for human resolution. Conventionally, only three resolution options are available. A human operator must make the decision as to which of the three options to employ when resolving a flagged violation and must also oversee the execution of the chosen option.
As shown in Table 3, the first resolution option is known as a cash option. In the cash option the amount that is associated with the restriction, i.e., the $1,000 that would have been invested in AOL, is instead kept as cash.
TABLE 3ASSETHOLDINGIBM$2,000CKFR$1,000STSH$3,000AOL   $0Cash$4,000
In the second option, as shown in Table 4 and known as the distribution option, the amount that is associated with the restriction is distributed across the non-restricted securities in the style model in accordance with the model proportions. Thus, in the present example, the amount that would have been invested in AOL is instead spread across IBM, CKFR, and STSH in a 2:1:3 ratio.
TABLE 4ASSETHOLDINGIBM$2,333CKFR$1,167STSH$3,500AOL   $0Cash$3,000
In the third option, known as straight substitution, the amount that is associated with the restriction is invested in any one or more of the other securities in the style model, or even in another security not a part of the style model. Thus, as shown in Table 5, AOL could be replaced with EDS.
TABLE 5ASSETHOLDINGIBM$2,000CKFR$1,000STSH$3,000EDS$1,000Cash$3,000
With the currently available resolution options, there is no ability to distribute the amount associated with the restriction across only a portion of the remaining assets included in the style model. Thus, the human operator cannot distribute the restricted amount among those securities within a particular asset class, within a sector group, or within an issue type. Also with the currently available resolution options, there is no ability to distribute the amount associated with the restriction evenly across non-restricted securities, instead of distribution by ratio across non-restricted securities. Accordingly, existing techniques for resolution of a violation are constrained to a limited number of resolution options.
Problems with currently available portfolio management systems extend beyond addressing violations in the context of a single account to addressing violations involving trade blocks. Conventional portfolio management systems only have limited capability to apply a resolution to less than all accounts within a trade block. The only way to achieve a unique resolution in an account within a trade block conventionally is by applying one resolution uniformly across all accounts in the trade block, then subsequently manually overriding that resolution on an account-by-account basis for each account requiring, as desired, a different resolution.
Further, conventional resolution techniques only provide the cash and distribution options, described above, for resolving violations within a trade block. There is no ability to stipulate one security substitution for one account, and another security substitution for another account. Accordingly, there exists even more limited resolution options for an account that is a part of a trade block than for an individual account.
Finally, conventional portfolio management systems lack an audit trail of restriction violations and resolutions. Rather, there exists only a general tracking of any trades resulting from the manual resolution. Accordingly, there can be no monitoring or the effectiveness of restrictions and associated resolutions with currently available portfolio management systems.